If Wall Street’s meltdown is tempting you to take your money out of the bank and put it under your mattress or bury in the back yard, don’t — at least not if your cash is insured by the FDIC.

While bankers, economists and politicians argue about the need for a federal bailout of the nation’s financial system and how it should work, there’s little disagreement with the belief that, no matter how many U.S. banks collapse, the Federal Deposit Insurance Corp. will make sure not a penny is lost from insured accounts.

“I would not worry about it and I’m no Pollyanna,” said Thomas Ferguson, a political science professor at the University of Massachusetts. Ferguson, who has studied Depression-era economics and the connection between money and politics, is flat certain that “they’re never going to run out of money for the FDIC.”

Whether taxpayers will have to chip in to make that happen is another story.

Created by Congress in 1933 at the height of the Great Depression amid thousands of U.S. bank failures, the FDIC is an independent federal agency charged with preserving and promoting public confidence in the nation’s financial system. The FDIC does this chiefly through a giant mutual insurance pool, which is funded by the banks themselves, not taxpayers. Currently holding about $45 billion, the insurance fund guarantees the safety of individual bank and thrift accounts up to $100,000. The National Credit Union Administration serves a similar function for accounts in most credit unions.

When a bank fails and is closed by a state or federal regulator, the FDIC steps in to help clean up the mess. Commonly, the agency sells the bank’s deposits and loans to another bank. “Most of the time, the transition is seamless from the customer's point of view,” the FDIC says on its Web site. However, when no buyer surfaces, the FDIC must use its insurance pool to help pay off depositors.

FDIC board chairwoman wins praise
The FDIC’s 4,500-member staff, which oversees deposits at 8,451 institutions, is managed by a board of five directors, appointed by the president and confirmed by the Senate. Current board Chairwoman Sheila C. Bair has won praise from members of both political parties for recognizing the impending sub-prime mortgage debacle shortly after taking the FDIC’s reins in mid-2006, announcing in a speech a year ago that “we have a huge problem on our hands.”

Since then, Bair’s agency has presided over more than a dozen bank failures and taken a substantial hit to its insurance fund. The FDIC has brokered deals on some of the largest failures – JPMorgan’s purchase of Washington Mutual last week, and the sale of Wachovia to Citigroup this week – averting payments from the pool. But the July closure of California’s IndyMac bank, for which there was no buyer, tapped the FDIC insurance fund for $8.9 billion.

While the American Bankers Association emphasizes that 98 percent of U.S. banks currently have the highest rankings that regulators can give them, critics point out that IndyMac was not listed as a troubled bank by the FDIC when it went belly up in the summer. They suggest that future costs of some of the deals brokered by the FDIC, along with impending bank failures, will require a taxpayer-funded bailout of the insurance fund.

“I don’t think there’s any doubt the fund is in serious trouble,” said Dean Baker, co-director of the Center for Economic and Policy Research, who emphasized that he is an admirer of FDIC chairwoman Bair. “Clearly, there’s a very strong possibility they’ll need recapitalization by Congress, if not this year then probably sometime in 2009.”

But the FDIC disputes that and took special exception last week to one report that said it could need as much as a $150 billion bailout. “The insurance fund is in a strong financial position to weather a significant upsurge in bank failures,” FDIC spokesman Andrew Gray wrote in response to the Bloomberg news piece. “The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee … that taxpayers may have to foot the bill for a ‘bailout.’”

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$5 billion in annual revenueJames Chessen, chief economist for the bankers association, pointed out that in addition to the $45 billion that remains in the fund, the FDIC receives some $5 billion a year in interest and premiums from member banks and has a $30 billion line of credit from the federal government that it could tap if needed. Also, at next week’s FDIC board meeting, Bair will propose a hike in bank premiums to further replenish the fund.

Chessen said reforms passed in the wake of the savings and loan crisis in the 1980s, in which another federal deposit insurance agency, the Federal Savings and Loan Insurance Corp., became insolvent and was merged with the FDIC, make it clear that the onus is on the banks, not the U.S. Treasury. “Banks have built up that fund, they pay premiums to support it, they’ll rebuild it and they have to pay back any borrowing from the Treasury that would occur, and that would be a very rare circumstance,” he said.

Regardless of whether or not taxpayer money is at risk, most observers agree that insured deposits are not.

Even Baker, who believes an FDIC bailout is on the horizon, said, “Absolutely they’d be made whole. It would be catastrophic not to do that. Congress would certainly come through with the money to make depositors whole.”

Added Chessen, “Behind it all is the explicit full faith and credit of the government, which of course is exactly what backs Treasury securities. So what backs treasury securities is what backs the FDIC.”

“Nobody is doing a giant fake or a fraud,” agreed Ferguson of UMass. “These are really insured.”

The FDIC does acknowledge that many depositors are not familiar with the details of how deposit insurance works. A press release issued last week reminded depositors that “basic FDIC insurance covers up to $100,000 of deposits per account holder per bank, and up to $250,000 per account holder for deposit retirement accounts.”

Accounts held jointly and in trust can let depositors leverage their coverage well beyond individual limits. The agency’s Web site provides information about how these limits work.